Greek debt plan ‘should be dropped’

A member of the European Central Bank’s governing council has said that the policy of involving the private sector in cutting Greece’s huge public debt should be abandoned.

Athanasios Orphanides, the governor of Cyprus’s central bank, said that shelving the plan would be the only way to restore investor trust and prevent contagion continuing to spread across the eurozone.

Leaders of European Union member states came up with the plan, pushed most strongly by Germany, at a summit on 21 July. They said that involving the private sector in cutting Greece’s debts was necessary to ensure that taxpayers did not shoulder the entire bail-out burden.

At their last summit, on 8-9 December, leaders decided to reverse the policy. They said that it would not be pursued in the future – but the existing Greek private-sector involvement (PSI) plan would be kept in place.

“Can the promise to abandon the PSI doctrine in the future be convincing while losses on Greek debt are imposed at present?” Orphanides asks, writing in the Financial Times today (6 January).

Orphanides writes that reversing the decision on Greek PSI would “benefit the eurozone as a whole” as it would lower the borrowing costs for all countries.

The idea to impose losses on private investors was drawn up at a bilateral summit in Deauville between Nicolas Sarkozy, France’s president, and Angela Merkel, Germany’s chancellor, in October 2010, and endorsed at subsequent European Councils.

The ECB consistently opposed the practice, claiming that it would lead to a loss of trust in the eurozone’s sovereign debt markets.

Orphanides criticised the “collective failure of eurozone decision-makers” to tackle the eurozone crisis effectively. He said that the failure “has been marked by a sequence of EU summits and aborted plans that have convinced some that a solution is beyond reach”.

The arrangements for private investor participation in Greece’s second bail-out, worth €130 billion and agreed in October, are yet to be finalised. As part of the plan, private investors would take a 50% ‘haircut’ on Greek bonds. The rest of the bail-out would be funded by other eurozone member states and the International Monetary Fund.